EUR 35.24 For Business Accounts Only

ETEL EY | Raise TP by 14%; Maintain Overweight

Most undemanding valuation in region, delivering strong results; 41% upside. TE’s performance in 9M20 was unmatched by peers, with adjusted EBITDA surging 45% y-o-y. However, the current stock price implies a 2021e EV/EBITDA of 2.2x for the consolidated entity and 1.6x for TE standalone, 5.5x below peers’ average, unjustified, in our view, with a consolidated 2020-22e EBITDA CAGR of 14% and TE standalone EBITDA CAGR of 17%. A possible materialisation of the Vodafone Egypt (VFE) sale to STC [Underweight | TP SAR86.09] will be positive for TE’s valuation and could act as a trigger for the stock. We value TE at EGP17.6/share, implying a 2021e EV/EBITDA of 2.8x.

Hike VFE’s valuation by 6% to EGP11.8/TE’s share. This comes on a 3% increase in our 2021e EBITDA estimate, following the company’s top line growth of 8% y-o-y in 9M20 vs. our previous estimate of 6%, mostly on mobile BB. Our valuation for VFE stands at EGP20bn, implying a 2021e EV/EBITDA of 3.5x, 19% below STC’s valuation for the asset of EGP25bn, (EGP14.7/TE share, net of tax). We assume no dividends from VFE (vs. our previous DPO estimate of 50%), as the company aims to finance the new spectrum internally.

Raise our TE standalone valuation by 37%, on strong fixed BB performance, infrastructure projects. TE standalone reported 18% y-o-y revenue growth in 9M20 vs. an average drop of 1.5% y-o-y by MENA peers. ARPU reached EGP156 in 3Q20, up 21% y-o-y, with an increase in fixed BB HH penetration to 35% vs. 31% by end-2019. We still see fixed revenue growing at a 2021-25e CAGR of 15%, on an increase in penetration. We also account for an expected EGP5bn new agreement with the government, as part of the digital transformation plan. This boosts our 2021-24e total revenue and EBITDA estimates by 14% and 22%, respectively, warranting an increase in TE’ standalone business valuation. This comes despite a surge in capex and net debt estimates, to account for the infrastructure plan and new mobile spectrum.

Risk skewed to the upside. Key upside risks to our valuation are: i) the university connectivity project, ii) monetisation of land bank, and iii) executing the new data centre. Nonetheless, TE’s funding needs are expected to rise in 2021e, to: i) continue the fibre network rollout plan, ii) finance the acquisition of the new spectrum, iii) start Phase II of the digital transformation project, raising 2021e capex estimates by 45% to EGP9.5bn (28% to sales). As such, we look for 2021 net debt to grow to EGP21bn. Timely collections of government receivables and execution of the digital transformation and subsea cables projects are the key watch factors for the company.